So has the Russian mafia finally met its match?

The year 1995 was not a good one to be a banker in Russia. In Moscow alone, over 13 high-ranking financiers were killed. Sated with reports of the monstrous crimes that were part of daily life in the city, Russian papers quickly tired of the story. Only when one of the bankers was poisoned, rather than meeting his fate at the hands of a hitman like his predecessors, did the story briefly make front-page news again.

This is the Russia of popular Western imagination. A country of nouveaux riches mobsters posing as businessmen and government officials, who cruise Moscow's streets in fleets of flash cars, negotiate business deals over copious amounts of vodka and seal lucrative business partnerships by sharing prostitutes.

In 1995, Martin McCauley was spending more and more time in Moscow, having gone into business with a Russian, Mikhail Pasternak. Together they were compiling a vast database of information on Russia's banks, which was no easy task. When McCauley tried to investigate property ownership in Moscow, he was told by a high-ranking female official of local government: "Don't ask." Neverthe- less, things proceeded apace.

Then, in 1996, the two women they employed as secretaries had a fatal accident. On their way to work, a lorry "deliberately rammed" into their car, and they were killed outright. Shortly afterwards, Pasternak "disappeared". McCauley is adamant that Pasternak too was murdered. He was only 32. McCauley left Moscow as soon as he heard.

The banking crisis of August 1998 and the consolidation of the banking world, followed by Vladimir Putin's accession as president in March 2000, created a turning point. Unlike his predecessor, Boris Yeltsin, Putin has established a strong tenure both politically and economically. He understands the need to divorce economics from politics, breaking the hegemony of the oligarchs who head a complex web of bureaucratic corruption.

Business regulation is increasing. In 1998, the bankruptcy laws were renewed and tightened to prevent the mass exodus of funds from the country. They have been further updated this year. A competent tax code has been drawn up and a land code that will enshrine the value of "private property" in law is underway.

But what is the reality at ground level? Is the depth of the corruption in Russia irremediable? Reports filtering out of Russia have highlighted the controversial business practices at the likes of energy giant Gazprom, where Putin stepped in to replace the management, and Russian Aluminium, where subsidiaries were found to have used violence against competitors. Both companies are supposed to have cleaned up their acts.

An example of the problems that still persist is shown by the Canadian group Norex Petroleum, which has a majority Russian oil company called Yugraneft. The company watched helplessly in early July when its minority Russian partner, Tyumen Oil, sent heavily armed men into Yugraneft's Siberian head office and ordered all staff to leave. Tyumen then took control of Yugraneft's nearby oil- field, again banishing staff at gunpoint. During the week of 9 July, it took control of Yugraneft's $30m (£20.3m) US bank account.

Norex chief executive Alex Rotzang immediately received a Russian court order requesting Tymen to remove its thugs from Yugraneft's offices in the Siberian city of Nizhnevartovsk.

The order hasn't worked and Mr Rotzang commented: "They have over 1,000 armed men around the city. That's more than the police have."

Administrative violations are also a part of Russian business tradition. No business licences can be obtained without a lengthy process of finding a contact at regional government level and paying him off. Similarly no business survives without a protection racket. A London solicitor who specialises in Russian affairs takes up the story: "You've got no choice but to hire them and they may employ someone to steal from you, even if you do hire them. Often you'll be approached by as many as four gangs. If you only have the money to employ one, the others will be offended. You may find the licence which you got a week before is no longer valid."

In such an environment, banks are obliged to take similar preventive measures. In 1998, McCauley visited a high-profile banker. The young man had read many of McCauley's books while studying for a BPhil at Oxford. He was lured into the banking world before he had completed his studies by the promise of a high salary and had suffered his first heart attack by the age of 26. He responded candidly when McCauley broached the subject of the mafia: "He told me, 'The mafia are not a problem'. He confirmed that most Russian banks have their own private armies."

The obstacles stacked against creating a more transparent business environment are pervasive. Yet progress is being made. The London solicitor is positive: "It's becoming progressively easier to do business in Russia. You can make honest money now and in 10-15 years' time, Russia will be the same as the UK."

FBI investigations during the 1930s and 1940s provide a context for the progress to date. They expose Russian businessmen acknowledging that they could do nothing without paying the mafia. Today a businessman is required to give a backhander to someone in government to obtain a licence, but thereafter he is effectively able to run his business as he sees fit.

Two days ago, Putin announced that by 2010, life will have improved dramatically in Russia, which is currently one of the only economies in Europe to be growing. That said, Russia's greatest weakness remains its inability to attract foreign investment. In 1999, total accumulated foreign investment was $29.3bn, compared to $600bn in China. Scarred by the experiences of the 1990s, Western businesses continue to be wary.

Should they be? A corporate financier who worked in Moscow for most of his twenties blames Western businessmen and their Russian counterparts for the misfortunes of the 1990s. "Many Western businesses demonstrated terrible arrogance," he says. "They were naive and far too quick to sign up. Business is done differently everywhere. In Russia ... any negotiation is preceded by an arranged dinner that is extremely boozy ... You can't expect to go in there with a stiff upper lip and a pressed suit. It's a test. The trick is to play the game, but not get distracted by it."

'Bandits, Gangsters and the Media' by Martin McCauley is published by Longman on 19 November.